Towards sustainable energy transition in the wake of climate change

Abstract

There is growing awareness that climate change will have a substantial impact on countries' economic and financial development and the risks of financial institutions unless there are urgent mitigating actions taken to intervene and minimize these risks. An important factor in this respect is the agreement reached in Paris in December 2015 to reduce CO2 emissions in order to curb the increase in the rise in the average temperature to acceptable, minimally damaging levels, i.e. well below 2 degrees Celsius in 2030, and preferably only 1.5 degrees. This inevitably means that the composition of the demand for energy, and thus supply, will change. Fossil-fuel producing countries in the Gulf region and elsewhere are becoming increasingly aware of the need to gradually manage a diversification of their economies to reduce dependency on hydrocarbon revenues. The recent low oil prices have underscored the importance of this strategy. At the same time, energy consuming economies such as Europe, but also in Asia, are taking measures to reduce their dependency on hydrocarbons. There is a real possibility that intensively hydrocarbon consuming countries will have to take measures to comply with the climate targets set, by reducing the consumption of hydrocarbon significantly. Harsh measures are in particular needed when these countries start changing their policies relatively late. This risk is particularly important now, with low oil and gas prices, as these countries do not have an incentive to change their behavior in the short term. For the medium to long term it is possible that both hydrocarbon consuming and producing countries will be confronted with large negative economic consequences as a result of this. Hydrocarbon consuming countries will not be able to satisfy the demand for energy, as a switch to renewable energy sources will not be possible in a short period of time. At the same time, hydrocarbon producing countries will be deprived of an important market and oil and gas reserves will reduce in value substantially. This will also potentially have a negative impact on the shareholder value of major and supermajor independent oil and gas companies, especially important where this also underpins many developed economies. Further, innovation into renewables – which is happening at a massive scale - may allow energy consuming countries to switch more easily to these alternative forms of energy, despite the low oil and gas price. This scenario might be beneficial for fossil fuel consuming countries, but not at a global level. Indeed, in this scenario, the capacity of hydrocarbon producing countries to sell oil and gas to energy consuming countries will be adversely impacted. This scenario might not only have an adverse economic impact on the Gulf region but might also lead to political and social destabilization. Such a scenario might materialize in a relatively short span of time if no action is taken to create acceptable, commercially viable technology solutions that enable an orderly minimally damaging transition to a low carbon world. Texas A&M University in Qatar (TAMUQ) and Maastricht University in the Netherlands (UM) have initiated work to embark on a joint programme with respect to the energy transition challenge focusing on how to ensure an orderly, sustainable and benign energy transition scenario, beneficial for both hydrocarbon consuming and producing countries. It is based upon a minimally disruptive scenario where hydrocarbon consuming countries will continue to consume oil and gas, while GCC countries will continue to produce and sell hydrocarbon for a considerable time to come. In addition, climate targets will be achieved and GCC countries will have sufficient time for their diversification policies to be implemented.